Subex @ Rs 11 ~ Five Questions that come to Mind

Subex @ Rs 11  & thus available around par of FV Rs 10~ Five Questions that come to mind?

First a bit of background of Subex that got grounded bad from a high of Rs 887 in 2005 to a low of Rs 4 in 2013 before sputtering to show some life crossing Rs 18 in 2015 & again correcting sharply to below Rs 10….It’s showing some life again with Market Cap moving up to @ Rs 550 crs & huge Volumes .It’s in the Telecom Software Products space providing Business and Operations Support Systems (B/OSS) to Communication Service Providers (CSPs) across the Globe.

If you’re training with me you’d know how to look at it now….just listing in brief the five points I’m looking at :

  1. Management ~ Its now 48 year old Surjeet Singh ,ex CFO of Patni Computers managing Subex.He’s the CEO & MD & has a Cost to Subex Group Package of over Rs 5 crs.Till September 2012 it was the 1992 Founder Subhash Menon who ran the Show and even remained Director till 2015.Menon’s Rise & Fall Story has been covered in some interesting detail by Forbes in November 2012 .Do even read the Readers Feedback to the Forbes Article. The Board also has Sanjeev Aga,ex MD of Aditya Nuvo & Birla ATT (Idea) & Anil Singhvi of Ican & earlier known for his long tenure with Ambuja Cement.He also was an advisor for two years with the Reliance ADA Group & advised on the Enam Axis Bank Merger .The Promoter Category shows a few investors with a very low stake.In fact many  others especially FPIs have much larger stakes & a few were allegedly instrumental in Founder Menon’s ouster because of the Syndesis Acquisition debacle that crippled Subex.The suspicion was that there was more than meets the eye in this US $ 165 m acquisition & it’s funding by US $ 180 m FCCB 1(See below) ~ Question : What’s Surjeet Singh’s strategy going forward to address the challenges that yet remain & scale the Topline & Bottomline significantly ?       
  2. Networth Jump with FCCB Conversion~ Networth has jumped from Rs 209 crs at March 31,2015 to Rs 727 crs at March 31,2016 as Company revised FCCB III Conversion price downward yet again from Rs 22.79  to Rs 13 on May 14 2015.This attracted near full conversion of the FCCBs taking the Equity from Rs 182.92 crs to Rs 502.81 crs in FY 16….These FCCBs were the huge Debt overhang in the Balance Sheet.The Book Value thus became Rs 14.46 on March 31,2016 with the Balance Sheet showing very little Debt with just US $ 6.95 m o/s on all FCCBs I ,II & III .The FCCB Story commenced 10 years ago in 2006/7 when 2%  FCCB I for US $ 180 m was issued with Exchange rate fixed at Rs 44.08 & Conversion at Rs 656.20.In 2009/10 a restructuring proposal of FCCB 1 was offered at a 30% discount to Face Value.Those who held US $ 141 m face value FCCB I accepted & were issued 5% interest per annum, payable half yearly US $ 98.7 m FCCB II with exchange rate fixed at Rs 48.17  & Conversion at Rs 80.31.Redemption date was the same at March 9,2012 which RBI extended to July 9,2012.However another restructuring offer was made in June 2012 to FCCB I & II Holders & most (US $ 38m of the 39 m FCCB I o/s & US $ 53.4 m of the 54m FCCB II o/s) accepted it in July 2012 & were issued 5.7% interest per annum payable half yearly FCCB III for US $ 127.72 m with exchange rate fixed at Rs 56.0545 & Conversion Price at Rs 22.79 with maturity date of July  7,2017.On May 14,2015 the Conversion price was reset on these FCCB III to Rs 13  ~ Question : Though the FCCB Mess has been resolved where lies this High Networth & how is it going to be serviced?
  3. Goodwill on Consolidation ~ The Networth lies in the Carrying Values as on March 31,2016 of the Investments of Rs 647.39 crs made in Subex(UK) which contributes nearly all of topline & of Rs 124.96 crs(lower by Rs 54.90 crs) in Subex Americas Inc.Consolidated Accounts throws up these Investments in the Goodwill on Consolidation.Company has,and new auditors,S R Batliboi & Associates(Previous was Deloitte Haskins & Sells) have accepted the continuing Goodwill Value of Rs 670.36 crs for UK & the fresh assessed Rs 97.26 crs for Americas(down by Rs 88.70 crs from the Rs 186.06 crs carried till FY 15).Company views this as fair based on their assessment of operations  & cash flows going forward & even external valuations.~ Question : These are Intangible & carry risk of Impairment going forward & thus are they yet being overstated even now ?
  4. Topline ~ Sales continue to hover in the Rs 320 crs to Rs 360 crs range last four years despite regular annual report noises on the potential of  mobile telephony going forward.Bottomline remains relatively insignificant even as FY 16 generates Rs 50+ crs and an EPS of Rs 1…maybe enough to service stakeholders like Employees & Working Capital Lenders but what about Shareholders~ Question :Even assuming lower Interest Burden with the FCCB Conversions & less risk of Exchange Fluctuations how would such a flat growth topline generate enough bottomline to service the Equity of over Rs 500 crs now?
  5. Subsidiaries Outstandings set off sought from RBI ~ Standalone Financials as on March 31,2016 reveal Trade Receivables,net of Doubtful Debt) from Subsidiaries  at Rs 412.73 crs &  Payables at Rs 441.28 crs.Company plans to apply to RBI to allow them to set these off. No Accounting adjustment has been made for these & neither have Auditors qualified their Report on the Standalone Accounts though they have drawn attention to it as an Emphasis of Matter ~ Question : That these have grown so huge on either side over the years without being settled does it signal at least a part being accommodation entries?

Remember how I had analysed & exposed Geodesic in 2012/13 at @ Rs 10 & with huge FCCBs too when many were floating it as multi-bagger potential to cross Rs 100.It dropped to under Rs 2 & has since been suspended from trading         

Over 600 Employees yet believe that Subex will Turnaround under Surjeet Singh…Question is do you as a Potential Investor ….or is the risk a bit too adventurous for your profile….Subex has little long term debt & is showing a positive bottomline now ….well the FCCB Mess certainly has been cleared up but at the cost of FY 16 creating an additional 32 cr shares which already created a selling momentum after the conversion…some yet may have to be sold off.

This is anybody’s & everybody’s share now with insignificant Promoter Holding….There are many who jumped in excitedly at Rs 18 last year & saw their Investment halve in quick time on selling pressure created by additional 32 crs created from August 2015, earliest effective conversion date was in this month ,on the FCCB III.Remember these FCCB Holders had already faced 30% Face Value Loss on FCCB II issue  + Exchange Loss from original Rs 44 & then Rs 48 & then Rs 56 when current rate is @ Rs 67 ….and shares converted at Rs 13 would surely have been crying to sell at Rs 18 to recover some loss for the holders!…. Now there are many yet aggressively buying in at Rs 9.50 to Rs 11…Volumes & Price Trends are telling some story…Selling Pressure seems to be ebbing

🙂 Anybody interested in acquiring  majority stake in Subex ? will cost you under just US $ 45 m or under  Rs 300 crs (@ Rs 67 ex rate)  for a 51% stake & you’ll get a Rs 350 crs topline company with little debt & in profits & servicing  most of the leading Telecom Operators & Communication Service Providers worldwide…and the Book is near Rs 15 with very little equity dilution remaining on account of remaining FCCB conversion….you of course need to believe the carrying worth of Investments in Subex (UK) & Goodwill on Consolidation shown because of it…you would also need to believe in Surjeet Singh’s exclamation in his statement in the FY 15 Annual Report that it’s Inflection Point & all at Subex are very excited about the road ahead

Would love to have you at my Fundamental Equity Training Workshop….there’s one scheduled for the full day on Saturday,September 10,2016 in Bangalore where more such case studies will be analysed & debated on Price vs Value…details will come up shortly

Cheers!

Update on evening of June 23,2016 

Been getting quite a few calls & messages today for this Subex post…let me make it clear…I have merely spelled out the facts & questions that came to my mind especially on the risks …I have not offered any opinion on whether one should buy or hold or sell Subex…that is left to the reader based on his risk profile & conviction & confidence levels…as for Geodesic,I am not comparing the two to spark fear or warning…just that in the past I have raised issues with IT companies that went on to strangle like Geodesic,Cranes ,Aftek & Teledata…in Geodesic & Subex there were both FCCB debt overhang + huge amounts due to & from subsidiaries…Subex has cleared the FCCB mess & is planning to set off subsidiaries balances if RBI approves….my blogposts are not for the purpose of one upmanship or to ridicule…I just put out some fundamentals & risks that I perceive …..readers can hold a contrary view on the risks….any downside or upside is for the reader to conclude

30 thoughts on “Subex @ Rs 11 ~ Five Questions that come to Mind

  1. [for some reason all i type here is in upper case. i am not expressing any anger 🙂 ]

    I have Never been a fan of Technology companies being run by any one other than technologist.

    sell.

  2. you are absolutely right. this company will not turnaround. its business is week and balance sheet is completely messed up. i strongly believe that fccb holders got a very sweet deal from the management. the management and board has done a big dis service to the shareholders by reducing the conversion price. they should have let the company default on the fccb REPAYMENT AND THEN NEGOTIATED A HAIRCUT ON THE DEBT WITH FCCB HOLDERS. BUT THEY CAVED IN TO THE FCCB HOLDERS AND SCREWED THE SHAREHOLDERS OF SUBEX.

    NOW FCCB HOLDERS WILL CONVERT FCCB INTO STOCK AND KEEP DUMPING THE STOCK TILL THERE IS NOTHING LEFT. THEY ARE HAPPY TO GET A LARGE PART OF THE PRINCIPLE BACK. AT THE SAME TIME, THE SHAREHOLDERS WHO ARE DREAMING THAT THE COMPANY WILL TURN AROUND WILL BE LEFT HOLDING THE BABY.

    IT IS INEVITABLE THAT THE COMPANY WILL CEASE TO TRADE AT SOME POINT OF TIME.

    ANOTHER SIMILAR CASE YOU CAN LOOK AT IT IS 3i software.

  3. “Anybody interested in acquiring majority stake in Subex ? will cost you under just US $ 45 m”

    Is it possible that i bought the majority share in Subex and as its book value is higher it can be sold for high.

    I’m SURPRISED, not even 1% of company’s share are with promoters…

  4. lolz…U r comparing subex with geodesic. And talking about exposing geodesic at a meagre 10 levels…where were you when it had fallen to 100 levels…long after the fccb issue. dare to publish this one …!!!

  5. Agree with anand, where he was when geodesic fell from 100 levels. I have been reading your blog frequently sir, you do good analysis with lots of boasting…

  6. Oops! Anand & Dave..seem to have miffed you with the Geodesic mention…actually Geodesic was never on my radar until a few approached me at Rs 10 to Rs 12 levels who had either suffered in the scrip & continued to hold or those who were keen to pick it up at the low levels of Rs 10 as they were convinced it was a multi-bagger…it was then that i covered Geodesic & was shocked at the poor Governance & despite pressure & pleading not to blog on it,I did…as far as Subex is concerned,it’s a different story & the new management ,after dispensing with the founder,is hands on to change the company’s fortune for the better…they have addressed one challenge of FCCBs though with heavy Equity Dilution & are working towards others…my sense is that they have two paths in front of them …either they go for inorganic growth funded by fresh debt or they look to sell out….maybe they’ll looking to do the former before they consider the latter…let’s see what happens….you have to believe in their story now to buy in…many do…you can see it in the volumes & fairly high delivery % & the price inching upwards….oh! as far as ‘boasting’ on the blog, apologise if you got that sense…I have been more cynical or skeptical than warranted at times & missed quite a few great opportunities….write that off to my “When in Fundamental Doubt ,Stay Out” mindset ….but do keep visiting my blog & comment whenever you feel like…Cheers

    1. Dear Dave,

      Could you please share your insights of your meeting with the management of the company.
      You can share here or by email.
      Regds

      Dear Gauravji,

      I guess it is an interesting analysis but i believe the company is out of the woods and the mention of
      Geodesic was little misleading and probably irrelevant in my opinion..though understood your point in the later part of the messages is well taken…

      secondly, there could be new avenues of revenues( again..believing Surjeet singh’s intvw 2 yrs back)….and i guess you have only factored into the existing business model…

      next, the credit rating agencies have upgraded their ratings 2 yrs back….. and the management said
      SBI is ready to offer them a million dollar loan… ( your former option could fit into this..fresh debt..inorganic growth)…….

      as i believe the company has the potential to grow and then at some stage at a much higher valuation they would be open for the next option and not in the near future is my opinion….

      next the bond holders according to you have taken a huge hit in the various stages of conversion of
      equity and the very fact that they forego the interest part to fresh conversion at 13 rupees, indirectly reflects the bond holders belief that the company is going to turn around and reward them to compensate their losses and maybe profits definitely !!!! I have an investment of few thousand shrs in this company and looking forward optimistically and the worst case i look at this way…..Looking at the startup fever and so many companies being getting funding left and right……i am more optimistic than previous times that someone might take a chance on this company in the coming times.. thinking….a startup may have more risk than choosing this established company with little risk and more rewards !
      Well, that is the rosy part of my opinions…. and worst case… would let go with 30% loss on my capital if at any point drops below 6.5 ( i.e 50% of the conversion value 13).
      regards

  7. Dear Dave,in Geodesic I refused to meet the Promoters & Management …However in Subex I’m inclined to do so as they are seen endeavouring hard to put the company back on track…have a few questions,other than in my blogpost, I would like to ask…Cheers

  8. OK Gaurav, for your information, I have met the mgmnt & got some insights, but still I Would like to know your views post your meeting with the mgmnt. Do share the transcript of your meeting on the blog.

  9. Puruji I only know how to spell ‘Technical’ & zilch about the approach as was never inclined having seen many perish by it in the last 30 years…if it works for you ,great…. fundamentally I’ve laid out my thought analysis in the blog post…my sense is that ,even if one is convinced it’s a good story going forward,it will not suit all risk profiles

  10. Hi Everyone, I am a newbie to Gaurav’s blog but have some investing experience in Indian markets, I have recently invested 5% of my total investment capital in Subex, as now I am believing what management had said in their last few interactions. Secondly, all of the above comments and Gaurav’s analysis is worth applauding. Many thanks guys. I am not from a finance/accounting background so was not able to understand gaurav’s point no.3 on Subex UK’s goodwill amount etc.

    I can be wrong but have few points to mention:

    1. One of the comments above were, Subex should have defaulted on its FCCB?

    After defaulting, what about companies reputation as its still a market leader in its type of industry with most of the leading telecom companies as clients. After default there would be a rating cut and who is going to give money to the company for future expansions (if any)

    2. Present names (Singh, Aga, Singhvi) associated with Subex had a great past record. Obviously past performance doesn’t guarantee’s future. But I still trust them and would like to stay with the co. for few more quarters.

    3. According to its COO, top-line was under short term pressure from last 4-6 quarters, due to shift in companies business model.

    4. New growth areas company has stepped in are IOT security etc. Small article on IOT security and its future.

    http://timesofindia.indiatimes.com/tech/tech-news/Worldwide-IoT-security-spending-to-reach-348-million-in-2016-Gartner-says/articleshow/51978812.cms?from=mdr

    5. I know the pace of their business growth is very tepid atm, but still they have of almost $150m worth of deals in their piggy.

    And Gaurav pls do share your views if you get a chance to meet the management. cheers 🙂

    1. gaurav , when are you planning to meet the mgmnt, you didnt get the appointment or what ? I mean before any recommendation , meeting promoters is essential. Do meet them and share views

      1. Dave I sense hostility in your comments…I thought I had made it clear on the blogpost itself “I have not offered any opinion on whether one should buy or hold or sell Subex…that is left to the reader based on his risk profile & conviction & confidence levels”…so therefore do not read any post as a recommendation…neither am I obliged to meet the management….you are entitled to your views on companies which I post about…and if you wish ,you could justify the view by responding by sharing only what is your interpretation on fundamental information available in the public domain & not by any that could be construed as Insider(reason why I have not approved your one response on another post)…Thanks for visiting my blog & lets not get into unnecessary & futile confrontation like quite often occurs between those active on messageboards & forums on stock websites & whatsapp groups …this blog’s purpose is none of these

        1. Sure gauarav and apologies if you felt my comments are hostile. I had no such intentions. In fact i thought if you meet the mgmnt you will get more clarity . If giving suggestion isnt acceptable to you, i wont post further on your blog. Thanks.

          1. No offence Dave…can sense,in the fundamental context of Indian Equities,you are eager,passionate,keen & quite forthcoming in expressing views…& you are absolutely right that meeting management personally can reveal more than reading or viewing on Channels what they have to say…like when shaking hands with them you can,if you can that is,instinctively assess if there is a ‘Promising Future’ or just ‘Future Promises’ being assured….whether Ability backs Intentions or it’s just ‘Bluff & Fluff’…many Promoters have serious vested interests….I’ve had the (mis) fortune of meeting them & their attempt to unduly influence…like there are over 4000 listed companies on BSE & when I was addressing the audience at a High Profile Corporate Governance Seminar some years ago I had enquired of an ex BSE CEO on the nexus of Insider Trading between Promoters & Brokers especially…he had replied “Gaurav,you’re talking of Insider Trading !when many Promoters are also Murderers & Rapists and I can’t do anything about it!”…this though cannot be assessed when one meets the Promoter ! :-)….Cheers & do keep visiting the blog & keep responding as long as we can keep the interaction wholesome !…Cheers

  11. Dear Gauravji,
    Again very interesting post from you.

    So how can one ( eg an ordinary small investor like me) have a credibility on the management of companies .
    As you rightly mentioned management would definitely have a vested interest and they might bluff or exaggerate certain scenarios. So is there any other method of learning to build confidence on the company for us. If you have any opinion, how and where can we get exposure or learn those methods.
    Thanks again and hoping to hear from you.
    Regards

  12. GP Hi
    Going through the comments my 2 bits. We have confidence in your assessment and we are sure you will be able to separate the wheat from the chaff, that probably is the reason Mr Dave was a bit impatient in cajoling you to meet the management..
    Mr Chander i differ with you on FCCB conversion with interest forego,as a sign of bond holders confidence as beggars are not choosers.Company was not in a position to pay and this story has been repeating year after year.
    Long story short GP PLEASE MEET THE MANAGEMENT 🙂

    1. You are right Pankaj, Beggars are not choosers. But now in Subex’s case those beggars are the owner/largest shareholders of the company and If I am not wrong they have full control over the Board/management. (This is reflected on the unexpected exit of ex CEO Mr. S Menon)

      I am more sort of bullish on so called IOT security market for the next few years. I am also trying to find/invest in some other IT companies in the said business. (lets see how Subex utilize this opportunity)

      There are still alot of if and buts on Subex’s revival… I am hoping, 2016-2017 might be a turning point for the CO.

      I am hoping for the best but also prepared for some turbulence… Thanks

  13. Hi, I am a first time visitor on the blog. Interesting observation by many.

    What I found interesting, – Senior Management People from Finance and Telecom lending their support to the company. It would be interesting to know, as to what led them to risk their personal reputation while supporting a company to turnaround which was supposed to be heading towards a total collapse.

    Their role and commitment towards the company can throw a light on where the company is heading towars.

    Also, current management need to throw some light on as to how do they plan to service such a huge Equity Base.

    As for Goodwill part, failed to understand much but one thing is very clear, all the takeovers in last one decade, we have seen impairment of goodwill / huge write offs.

    In the case of Subex, assuming Company will continue to depend on existing Product range, what kind of growth in topline is expected.

    What commitment / assurance the Management has given to FCCB holders and what commitment FCCB holders / Investors have given to the Management ?

    1. Hi Uday…Megasoft’s FY 16 Consolidated Sales = Market Cap = Debtors at March 31,2016 = Rs 70 crs thereabouts….they have been struggling for years but just about surviving…Current Ratio is significantly below 1….their revised business model puts huge pressure on working capital forcing short term borrowings…they state they are committed to adding value to all stakeholders….but i daresay not shareholders….shareholders have been living only on hope all these years…..XIUS (their big brand & sub) Hope…..perhaps TRAI allowing Mobile Virtual Network Operations (MVNOs) in India may pep up the Company….FY 16 shows some profit because they have knocked off Rs 28 crs of bad debt straight from Reserves contravening Accounting Standards…auditors have qualified on this…even after this the Networth is positive at Rs 128 crs giving a book of Rs 27/share with FV 10 Equity at Rs 47.27 crs….this though can be a misleading positive,given the lower than book share price of Rs 16 currently…reason is because this networth is represented by goodwill on consolidation of Rs 102 crs +Fixed Assets of Rs 92 crs + Current Assets of Rs 88 crs – Current Liabilities of Rs 152 crs….there’s a lot more that I may decide to post as a separate blogpost for wider readership… There are a few positives & potential too but are they enough to revive the company in the next two to three years to profitable levels where it can also serve the shareholders?

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